Oil & Gas = The EconomyThe Economy = Oil & Gas

Bruce LaCourFebruary 1, 2016

Graphs From “Peak Oil.Com”

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OPEC Became a Power in the 1970s

• Conventional oil production in the lower 48 U.S. states peaked around September 1970.

• An oil crisis began in October 1973 when OPEC proclaimed an oil embargo. By the end of March 1974, the price of oil had risen from $3 per barrel to nearly $12. This was a response to United States support of Israel in the 1973 Yom Kippur War. Long lines at the gas stations started to appear.

• The second, more severe, oil shock began in 1979. This time crude oil price nearly doubled and long lines at the gas stations reappeared. Oil users then created a natural gas shortage due to the switch from oil to natural gas, which also became a problem.

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OPEC’s Power Waned in the 1980s

• The oil price peaked in 1981 and started falling again causing the demand for natural gas to drop.

• By mid 1970s to the late 1980s, nuclear energy became the “new solution” to the problem of human energy consumption.

• Energy conservation became an issue in the early 1980s, but the interest soon disappeared as oil and gas prices declined.

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OPEC Regained Control in the 1990s

• The 1990s, except for a slowdown in 1990 to 1992, was a period of growth with little concern about energy conservation. Plus the internet is the less energy intensive new future! Party like its 1999!!! Then 2000 came.

• Natural gas discoveries and pipeline infrastructure around the world started to make the U.S. “Basic Chemicals” industry less competitive in the 1990s. Many U.S. Ammonia and Methanol plants were shutdown by 2005.

• The term “Peak Oil” became an issue and was popularized in 2002 by Colin Campbell and Kjell Aleklett, one a geologist and the other a Physics professor, and they formed The Association for the Study of Peak Oil.

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The Early Years of the First Decade of the 21st Century Raised Concerns

• By 2003, the price of natural gas increased rapidly and U.S. methanol and ammonia production was being replaced by ammonia and methanol plants in Trinidad. Other places like Chile, Egypt, Qatar, Indonesia, and China started to provide increased competition to the natural-gas based petrochemical industry.

• In 2003, a report by the National Commission on Energy Policy stated that “…recent trends (in natural gas) indicate the future supply and demand dynamics for natural gas and relatively low prices (from 1990 to 2002) may be far different from the experience of the 1990s, leading many analysts to conclude that the North American natural gas market has moved to a permanently higher price level.”

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The FED Thought It Could Prop Up The Economy Forever

• Allen Greenspan’s low interest rate policy and the loose restrictions on mortgage lending created the housing bubble. Housing prices peaked in 2006. Increased foreclosures rates in 2006-2007 among U.S. homeowners led to an August 2008 crisis that nearly shut down the entire financial system.

• The second bubble, housing based on subprime mortgages, collapsed leading to unprecedented bank bailouts. According to the U.S. Treasury Department and the Federal Reserve and reported to Congress, refusal to bail out the large U.S. banks would have led to total shutdown of the economy.

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Tight Oil and Shale Gas Arrived to Save The Day!

• The beginning of the first part of the third bubble started in 2006 with the “Shale Gas” craze. Natural gas drilling started to increase significantly in Barnett and later in Fayetteville and Haynesville plays in response to the rising natural gas price.

• Ben Bernanke became the next chairman of the Federal Reserve in February, 2006. He instigated QE1 in November 2008 in response to the bursting of the second bubble.

• In 2009, natural gas production started to skyrocket in the Haynesville play and six months later in the Marcellus play.

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By 2012 A Few Started to Educate about the True Potential of Tight Oil and Shale Gas

• In its Annual Energy Outlook for 2011, the US Energy Information Administration (EIA) more than doubled its estimate of technically recoverable shale gas reserves in US to 827 trillion cubic feet from 353 trillion cubic feet. In the 2012 Outlook, the estimate was lowered back down to 482 trillion cubic feet.

• In February 2013, one of the many independent analysts trying to bring sensibility and accurate statistics to the shale oil-gas craze, J. David Hughes, published “Drill, Baby, Drill”( a play on the Republican moto) through the Post Carbon Institute web site. The report was a critical analysis of shale gas and shale oil (tight oil) and the potential of a shale revolution.

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By 2013 The Concern About Tight Oil and Shale Gas Began to Increase

• In December 2013, J. David Hughes published “Drilling California: A Reality Check on the Monterey Shale” that had empirical analysis of actual oil production data from the Monterey Formation. In this report Hughes predicted earlier what EIA later admitted to about the gross overestimated recoverable reserves.

• In October 2014, J. David Hughes published “Drilling Deeper” in which he investigated whether the Department of Energy’s expectation of long-term domestic oil and natural gas abundance was founded.

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The Petrochemical Industry Ignored Concerns in 2013

• By mid 2013, one announcement after another was being made for new Louisiana and Texas facilities based on “long-lasting” low natural gas prices. By 2014, at least five export LNG plants were announced and several methanol plants. Announcements for new ammonia plants were popping up all over the United States.

• Some were calling for a “new petrochemical age” in the U.S. Shale gas would do wonders!

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By 2015 Reality Started to Set In

• By January 2015, the oil price was staying below $50 a barrel and one oil and gas operation after another announced capital spending cutbacks and labor reductions. Articles began to be written about the danger of spreading economic disaster due to junk bonds associated with the “shale revolution”.

• The crude oil price remained below $50 a barrel for the entire year. The Baltic Dry Index began to fall by the Fall of 2015 and the Chinese economy started showing signs of slowing. The Baltic Dry Index eventually reached an all-time low in January 2016.

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2016 Starts The Slide Downward

• The first month of 2016 was the worst start for the DJIA in the modern history. All the industrialized economies and their stock markets were in decline.

• Both the U.S. tight oil and shale gas production numbers were in decline, and probably by the end of 2016 many of the smaller oil and gas operators will either go bankrupt or consolidate with survivors to join the many that are already out of business.

• The rest of 2016 will continue to show declines in total U.S. “crude oil” production.

• Many OPEC countries are in deep financial trouble with a few on the brink of bankruptcy.

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Oil & Gas = The Economy and The Economy = Oil & Gas

• It should be obvious that oil & gas are the major drivers of the U.S. economy, not Apple, not Amazon, not Facebook, not Wal-Mart, and certainly not the Federal bureaucracy. In the last ten years, the price of crude oil made two trips over the $100 a barrel mark and the U.S economy crashed both times.

• Now the price of oil is crashing below $30 a barrel and you read idiotic headlines like “Can $30 Oil Crash the Economy”. The price of oil is dropping due to the economy starting to crash in June 2015, not the other way around!

• The lack of demand is the reason for the low price of oil, and demand will not return until debt destruction has removed all the weak players from the game. See the next slide.

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Increased U.S. Oil Inventory is an Indication of Lack of Demand Similar to the 1929 Crash

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How Does This Play Out?

• First we will have severe deflation. Some say we are headed for a 1930s type depression. Debt destruction must destroy overcapacity in all phases of the economy, but especially in commodities. Oil & gas are the most important commodities.

• The survivors in the oil & gas industry will resume production eventually; however, future production will never reach 2015 levels again. I believe we will see some type of crude oil supply shortage before the end of this decade and these shortage problems will worsen in the next decade.

• In the past, OPEC came back stronger after a period of economic slowdown, but OPEC is in rapid decline as the next few graphs will show.

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Iraq is the Reason for OPEC Production Increase Since 2012

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Saudi Arabia is Busting at the Seams

• The graph on the previous page (thousand bbls/day) shows that Iraq is the reason for the production increase from OPEC since 2012.

• Saudi Arabia (SA) has been laboring for years to try to both kill “Shale Oil” and keep their populace from revolting. However, Saudi Arabia and probably the entire Middle East could fall into total chaos any day now.

• The graph on the next page (thousand bbls/day) shows that all the billions SA spent to try to ramp up production above 2005-2009 levels resulted in a temporary increase of about 8%, and now the sheiks are trying to outlast U.S. tight oil producers. They are losing steam fast.

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SA Spent billions to Try to Ramp Up Above 2005-2009 Production Levels

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The Rest of OPEC is in Rapid Decline

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The Rest of OPEC is in Rapid Decline

• The graph on the previous page (thousand bbls/day on the left and average crude oil price on the right) shows that the rest of OPEC (other than Iraq, SA, and UAE) are in rapid decline. Venezuela especially is in deep trouble, so is Nigeria.

• Starting this year, we will witness a battle between declining demand for crude oil and declining production as the weak players start falling out of the game. What happens to the price of oil will depend on whether demand or supply is in a steeper decline.

• During this time, U.S. heavy industry, especially the petrochemical industry, had better operate much more efficiently because the “good ole days” are over.

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Don’t Expect Help From Canada or Mexico

• The usual reply from the “eternal optimists” is that Canada will come to the rescue. Canada along with the “Tight Oil Ponzi Scheme” is the reason for the great buildup in U.S. inventory in the last 18 months. As the next graph shows Canada is the number one importer, and has been for some years. However, Canada is already in economic recession and the great tar sands investment boom won’t return anytime soon, if ever.

• Canadian oil production is in decline, and the rate of decline can only increase as the economic slowdown worsens.

• Mexico’s oil production is in decline, and recent events will ensure an even more rapid decline.

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Canada Took First Place in U.S. Imports Years Ago

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Canadian Oil Production is Also Declining

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The Payback for “Shale Oil-Gas” Boom is on the Way

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Energy Conservation Will Become the Primary Concern

• I believe we will see some type of crude oil supply shortage before the end of this decade and these shortage problems will worsen in the next decade. The past support from the big importers will not be available.

• The tremendous increase in U.S. oil production from 2010 as shown on the previous slide was a result of the loose monetary policy of the Federal Reserve which benefited only Wall Street that threw money at every shale oil and gas driller that could walk and talk. Most of these outfits have never made what use to be called “profit”. They just drill as long as Wall Street keeps feeding them. That’s coming to an end soon.

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Now It is Payback Time

• U.S. oil was supposed to be the new Saudi Arabia. Production almost reached the 1970 peak. Now reality will set in. However, it is much too late and future generations will be paying for this period of extreme stupidity for many years to come.

• I believe energy conservation will become the primary concern in the third decade of the 21st century and many will finally begin to understand the conclusions of the much ridiculed study “The Limit to Growth” of 1972.

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